The rupee rose to a near four-week high on Tuesday as foreign funds bought government debt before limits on the amount of bonds they can buy expire in mid-January.
A more than 1.5% rise in Indian share prices added to the positive view on the currency, traders said.
At 10:29 a.m. (0459 GMT), the rupee was at 52.25/26 to the dollar, close to the early high of 52.24, a level not seen since December 16 and above Monday's close of 52.50/51.
"People seem to be comfortable going short on the dollar owing to improving risk sentiment," said Ashtosh Raina, head of foreign exchange trading at HDFC Bank. "It is quite possible the rupee could touch 51.50 in the next few sessions."
Traders said foreign funds' interest in government debt has picked up on rising expectations that the central bank will soon start easing interest rates to boost faltering growth.
In November, the government raised the ceiling on foreign institutional investment in government and corporate bonds by a total of $10 billion to help boost foreign inflows. The auction for the limits was conducted on November 30 and rights to buy the bonds must be used by mid January.
Net inflows into Indian debt so far in January stand at about $1.6 billion, compared with about $211 million for equities, according to the Securities and Exchange Board of India.
Prime Minister Manmohan Singh on Sunday said India's economy would likely grow about 7% this fiscal year, below the 7.5% the government forecast last month.
One-month offshore non-deliverable forward contracts were quoted at 52.53, indicating some weakness in the short-term in the onshore spot rate.
In the currency futures market, the most-traded near-month dollar-rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange were all around 52.50 on total volume of $927 million.
